Just curious as to what criteria you are using for Benefits, I have just come off JSA and it was £52 a week.

IPPR think-tank today point out that VAT revenues are likely to be higher than previously forecast.

To argue that VAT income automatically rises when inflation goes up without wages keeping pace, it’s necessary to believe that the laws of supply and demand don’t apply, and that an increase in the price of something doesn’t reduce the number of people who are prepared to pay for it.

People can only spend what they can spend, and essentials are going up faster than other goods. Logically, this should mean people spending less on VATable items, and VAT revenue falling. VAT revenues would be increased by debt going up faster than expected (cf Cameron’s non-speech) or by wages going up faster than inflation.

Of course, it’s just another blip, no need to panic. What, it’s a trend you say? Er…

Point 3 – NOW people are angry? Sigh.

@ oldpolitics

“People can only spend what they can spend, and essentials are going up faster than other goods. Logically, this should mean people spending less on VATable items, and VAT revenue falling.”

I’d have thought so too. Does anyone have an answer to this point?

G.O, oldpolitcs.

I was under impression majority of inflation came from fuels, which attract VAT

http://www.guardian.co.uk/uk/2011/mar/13/petrol-price-rise-george-osborne

otherwise, it depends on elasticities of demand as prices change and real wages fall, I don’t think there’s any ‘logical’ problem with higher prices meaning VAT revenues may be higher than previously thought.

@ 1 Ben Martin. You must be under 25 then. There’s a slight increase in JSA once you get over 25.

BenMartin-under 25rate?

Ben Martin-under 25 rate?

“The extra cost to the Treasury of a higher CPI could be between £1.2bn to £1.8bn for 2012/3 than predicted earlier.”

The £1.2bn figure excludes tax credits; the £1.8bn figure doesn’t. Neither figure includes public sector pensions, spending on which will now rise by an extra 270 million – bringing the total above £2bn.

@GO, I think it is ansered in point 5 that people will spend less as they are squeezed, which seems to contradict point 4 that VAT receipts ill go up.
In addition as VAT is on “luxury” items (although a quick look at a supermarket receipt shows HMRC idea of luxury is not the usual one) as more of peoples spending goes on essentials thay should pay less VAT.

Another cotradiction, appears to be deflation. We are apparently importing inflation, fuel, food etc, so a raise in interest rates wouldn’t damp inflation, but at the same time a danger is deflation due to low demand. But if we are inmporting inflation why should prices go down even if demand in the UK falls – unless it falls everyhere else as well.

@6 Petrol will, sure – though I’m not sure petrol prices are moving much at the moment, there was a surge in Winter and since then if anything they’ve fallen back. Other fuel (domestic heating, particularly) seems to be a large part of this latest rise, and is still VATted at 5%, isn’t it? So less VAT income from that than from discretionary spending.

@ Luis

OK, there’s not a strict logical problem there; still, doesn’t it make sense to think that as prices rise and wages stagnate, people are going to be spending a higher proportion of their income on ‘essentials’ like food and domestic energy that attract little or no VAT, and a lower proportion on ‘luxuries’ taxed at 20%? If your food and utility bills have jumped by 5%, surely you’ve just got less money to spend on higher-taxed goods?

Over the medium to longer term, higher inflation erodes the value of money faster. This means government debt is easier to pay off, since that does not take inflation into account.

About 20% is index linked, isn’t it?

I know some gilts are.

G.O

yep, makes sense that spending on VAT-able items may fall to accomodate higher food prices (even if domestic fuel only attracts, what, 5%?, higher fuel prices mean higher VAT revenues from that) but whether that outweighs the effect of high prices on VAT-able items, who knows.

All of Sunny’s above points are more or less correct….

….this is exactly what the debasement of currency through QE is likely to provoke though. US QE has been enormous, UK QE quite large and in effect Europe is likely to do something approaching QE with the leveraged unsterilized ESFS.

QE isn’t providing growth though as the uncertainty it is causing for long term debt dynamics (and thus government interest rates) and the damage it is doing to pension funds is likely to cause a much alrger problem further down the road.

With just a few caveats, I think Mervyn King’s recent speech on the challenges facing the British economy is a solid – and worrying – analysis of the issues:

Mervyn King: time ‘running out’ to solve world economy crisis

Britain is at risk from a fundamental crisis in the world economy and “time is running out” to solve it, the Governor of the Bank of England has said.
http://www.telegraph.co.uk/finance/financialcrisis/8835221/Mervyn-King-time-running-out-to-solve-world-economy-crisis.html

QE may or may not provide an effective boost to Britain’s flagging economy but is there an alternative?

@17,

“I think Mervyn King’s recent speech on the challenges facing the British economy is a solid – and worrying – analysis of the issues”

I wonder if he’d like to take some responsibility for the disaster him and his central banking buddies have caused, rather than scatter pearls of wisdom from the Olympian heights. Personally I’d charge him with counterfeiting.

Inflation of the money supply is how the 1% run their ‘trickle-up’ system.

@18: “I wonder if he’d like to take some responsibility for the disaster him and his central banking buddies have caused, rather than scatter pearls of wisdom from the Olympian heights. Personally I’d charge him with counterfeiting.”

I regard that as completely ridiculous – you’ve absolutely no understanding of the situation or what QE is about.

As King puts it:

the British economy would stall without the combination of ultra-low interest rates and the extra £75bn in electronic money.
http://www.guardian.co.uk/business/2011/oct/18/mervyn-king-speaks-on-british-economy?newsfeed=true

Private sector bankers and their bonuses are far more to blame for our predicament than central bankers – in 2007, before the financial crisis, general government expenditure in Britain as a percentage of national GDP, was little more than in Germany and less than in Denmark, Sweden, Netherlands, France etc etc.

The main issue for King to answer is whether the Bank of England responded quickly enough to bail out Northern Rock from its reckless business model in the autumn of 2007. The Bank of England certainly wasn’t responsible for the failings of RBS and HBOS, even if a case can be made for saying the Financial Services Authority fell down on its task of regulating the retail and investment banks. Try the Turner Review in 2009 of the FSA and its failings.

Inflation of the money supply is how the 1% run their ‘trickle-up’ system.

*sigh*.

Inflation reduces the national debt, and the debts of mortgage holders. It disadvantages savers and bondholders.

In other words, it benefits younger, less wealthy people (people who bought their houses for 10X salary because otherwise they couldn’t get a house) to the detriment of older, wealthier people (who bought their houses for ten shillings and a bag of chips).

In other, other words, it helps reverse the colossal wealth grab perpetrated by the boomer generation on younger generations. Which is a Jolly Good Thing.

Oh yes, and I mean it’s entirely beneficial that 10% real-term inflation is hammering people on benefits who are now apparently not even going to see half that in uprating those benefits at the same time as there’s a massive consumer crunch going on, yes.

“is likely to cause a much alrger problem further down the road.”

The recent history of pretty much every western country is about short term fixes and letting future generations pick up the pieces. Provided each generation does it, there isn’t a problem. It becomes a problem once you no longer have the ability to postpone things.

@21 Leon

Weren’t you arguing quite the opposite on the earlier thread about tax?

You were essentially saying that *proportionally* rich people pay less of their money, and *proportionally* have more spare cash to do as they please.

Inflation affects rich people proportionally much worse, as it destroys their purchasing power to a much greater scale than poorer people.

Leon: where did you pull the 10% figure from?